OEMs in Africa: It’s No More a Bumpy Ride

After 40 years since closing its car producing plant in Kenya, Volkswagen (VW) resumed the production process last year by establishing assembly plant in the country.

Besides VW, France based Peugeot also started manufacturing cars in Kenya last year whereas Japanese giant, Toyota, has been assembling some of its models in the country since 2015.

Apart from this East African nation—Kenya, renowned carmakers like BMW, Hyundai, Nissan, etc. are establishing manufacturing or assembling facilities in different parts of the continent such as Nigeria in West Africa and Morocco in North Africa. Whereas, the Original Equipment Manufacturers (OEMs) those are located in South Africa are further increasing investment in order to strengthen their manufacturing units.

Recently, on March 21, 2018—African heads of state signed African Continental Free Trade Agreement as a result ACFTA emerged. Of a total of 55 African nations, 44 members initially signed the agreement. If ratified, the agreement will open wide market for investors of every sector including OEMs.

As per the agreement, member nations are required to allow free access to goods and services throughout the region removing tariffs from 90% of goods.

According to United Nations Economic Commission for Africa, the agreement is expected to boost the trade by 52% within the region in next four years. The agreement will come into effect if ratified by 22 signatory nations.

Surging Middle-Class

The increasing economic activities are key reasons to drive the market of commercial vehicles in Africa. The continent’s stellar economic growth which is estimated to grow at over 6% CAGR reaching US $4.5 trillion by 2025 will have more affluent population in the region by then.

For instance, the rise of middle-income countries, 25, in the region is presenting optimistic business environment to OEMs at present. It is because with the growth in middle-income nations, the continent is estimated to have more than 360 million middle-class by 2020.

Policies favoring OEMs

African countries’ plan to diversify their economy is also a factor to attract multinational enterprises in the region. And to encourage OEMs’ investment, country like Kenya has applied tough measures to restrict the import of used cars.

Nigeria in this regard is a step ahead. Through its National Automotive Industry Development Plan, it has tightened the ban on the import of used vehicles benefitting OEMs giants like VW, Ford and Nissan as they have their assembly plants in this West African nation.

Due to all this, Africa with the population of over 1.2 billion is presenting lucrative prospect for OEMs as there are roughly 22 million passenger vehicles in the continent at present. And the figure is quite low in comparison to other continents.

As per data by International Organization of Motor Vehicle Manufacturers, Africa accounts for 42 vehicles per 1,000 inhabitants which is 4.3 times less than that of global average—182 vehicles per 1,000 people.

Hence, this is right time for OEMs to penetrate the market of Africa because continent is estimated to witness the sales of over 2 million new cars on average each year till short and mid-term.